Iraq Contract Costs
DOD Consideration of Defense Contract Audit Agency's Findings Gao ID: GAO-06-1132 September 25, 2006The government has hired private contractors to provide billions of dollars worth of goods and services to support U.S. efforts in Iraq. Faced with the uncertainty as to the full extent of rebuilding Iraq, the government authorized contractors to begin work before key terms and conditions were defined. This approach allows the government to initiate needed work quickly, but can result in additional costs and risks being imposed on the government. Helping to oversee their work is the Defense Contract Audit Agency (DCAA), which examined many Iraq contracts and identified costs they consider to be questioned or unsupported. The Conference Report on the National Defense Authorization Act for Fiscal Year 2006 directed GAO to report on audit findings regarding contracts in Iraq and Afghanistan. As agreed with the congressional defense committees, GAO focused on Iraq contract audit findings and determined (1) the costs identified by DCAA as questioned or unsupported; and (2) what actions DOD has taken to address DCAA audit findings, including the extent funds were withheld from contractors. To identify DOD actions in response to the audit findings, GAO selected 18 audit reports representing about 50 percent of DCAA's questioned and unsupported costs on Iraq contracts. GAO requested comments from DOD on a draft of this report, but none were provided.
Defense Contract Audit Agency audit reports issued between February 2003 and February 2006 identified $2.1 billion in questioned costs and $1.4 billion in unsupported costs on Iraq contracts. DCAA defines questioned costs as costs that are unacceptable for negotiating reasonable contract prices, and unsupported costs as costs for which the contractor has not provided sufficient documentation. This information is provided to DOD for its negotiations with contractors. Based on information provided by DCAA, DOD contracting officials have taken actions to address $1.4 billion in questioned costs. As a result, DOD contracting officials negotiated contract cost reductions of $386 million according to DCAA. Based on the information provided by DCAA, as of July 2006, the remaining $700 million in questioned costs is still in process. Because unsupported costs indicate a lack of contractor information that is needed to assess costs, DCAA cannot and does not render an opinion on those costs. Therefore, DCAA does not track the resolution of unsupported costs. For the 18 audit reports selected for this review, GAO found that DOD contracting officials took a variety of actions to address DCAA's audit findings, including not allowing some contractor costs. In the contract documentation GAO reviewed, DOD contracting officials generally considered DCAA's questioned and unsupported cost findings when negotiating with the contractor. GAO found DOD contracting officials were more likely to use DCAA's advice when negotiations were timely and occurred before contractors had incurred substantial costs. For example, in three audit reports related to a logistics support task order negotiated prior to the onset of work, DCAA questioned $204 million. According to DCAA's calculations, $120 million of these questioned costs was removed from the contractor's proposal as a result of its audit findings. In contrast, DOD officials were less likely to remove questioned costs from a contract proposal when the contractor had already incurred these costs. For example, in five audit reports comprising about $600 million of questioned costs reviewed, GAO found that the DOD contracting officials determined that the contractor should be paid for all but $38 million of the questioned costs, but reduced the base used to calculate the contractor's fee by $205 million. By reducing the base, the DOD contracting official reduced the contractor's fee by approximately $6 million. In addition to identifying questioned and unsupported costs, DCAA has the option of withholding funds from the contractor and chose to withhold a total of $236 million for eight cases included in this review.
GAO-06-1132, Iraq Contract Costs: DOD Consideration of Defense Contract Audit Agency's Findings
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
September 2006:
Iraq Contract Costs:
DOD Consideration of Defense Contract Audit Agency's Findings:
Iraq Contract Costs:
GAO-06-1132:
GAO Highlights:
Highlights of GAO-06-1132, a report to Congressional Committees
Why GAO Did This Study:
The government has hired private contractors to provide billions of
dollars worth of goods and services to support U.S. efforts in Iraq.
Faced with the uncertainty as to the full extent of rebuilding Iraq,
the government authorized contractors to begin work before key terms
and conditions were defined. This approach allows the government to
initiate needed work quickly, but can result in additional costs and
risks being imposed on the government. Helping to oversee their work is
the Defense Contract Audit Agency (DCAA), which examined many Iraq
contracts and identified costs they consider to be questioned or
unsupported.
The Conference Report on the National Defense Authorization Act for
Fiscal Year 2006 directed GAO to report on audit findings regarding
contracts in Iraq and Afghanistan. As agreed with the congressional
defense committees, GAO focused on Iraq contract audit findings and
determined (1) the costs identified by DCAA as questioned or
unsupported; and (2) what actions DOD has taken to address DCAA audit
findings, including the extent funds were withheld from contractors. To
identify DOD actions in response to the audit findings, GAO selected 18
audit reports representing about 50 percent of DCAA‘s questioned and
unsupported costs on Iraq contracts.
GAO requested comments from DOD on a draft of this report, but none
were provided.
What GAO Found:
Defense Contract Audit Agency audit reports issued between February
2003 and February 2006 identified $2.1 billion in questioned costs and
$1.4 billion in unsupported costs on Iraq contracts. DCAA defines
questioned costs as costs that are unacceptable for negotiating
reasonable contract prices, and unsupported costs as costs for which
the contractor has not provided sufficient documentation. This
information is provided to DOD for its negotiations with contractors.
Based on information provided by DCAA, DOD contracting officials have
taken actions to address $1.4 billion in questioned costs. As a result,
DOD contracting officials negotiated contract cost reductions of $386
million according to DCAA. Based on the information provided by DCAA,
as of July 2006, the remaining $700 million in questioned costs is
still in process. Because unsupported costs indicate a lack of
contractor information that is needed to assess costs, DCAA cannot and
does not render an opinion on those costs. Therefore, DCAA does not
track the resolution of unsupported costs.
For the 18 audit reports selected for this review, GAO found that DOD
contracting officials took a variety of actions to address DCAA‘s audit
findings, including not allowing some contractor costs. In the contract
documentation GAO reviewed, DOD contracting officials generally
considered DCAA‘s questioned and unsupported cost findings when
negotiating with the contractor. GAO found DOD contracting officials
were more likely to use DCAA‘s advice when negotiations were timely and
occurred before contractors had incurred substantial costs. For
example, in three audit reports related to a logistics support task
order negotiated prior to the onset of work, DCAA questioned $204
million. According to DCAA‘s calculations, $120 million of these
questioned costs was removed from the contractor‘s proposal as a result
of its audit findings. In contrast, DOD officials were less likely to
remove questioned costs from a contract proposal when the contractor
had already incurred these costs. For example, in five audit reports
comprising about $600 million of questioned costs reviewed, GAO found
that the DOD contracting officials determined that the contractor
should be paid for all but $38 million of the questioned costs, but
reduced the base used to calculate the contractor‘s fee by $205
million. By reducing the base, the DOD contracting official reduced the
contractor‘s fee by approximately $6 million. In addition to
identifying questioned and unsupported costs, DCAA has the option of
withholding funds from the contractor and chose to withhold a total of
$236 million for eight cases included in this review.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1132].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John Hutton at (202) 512-
4841 or huttonj@gao.gov.
[End of Section]
Contents:
Letter:
Results In Brief:
Background:
DCAA Audit Reports Identified Billions of Dollars of Questioned and
Unsupported Costs on Iraq Contracts:
DOD Contracting Officials Have Taken a Range of Actions to Address
Audit Findings:
Appendix I: Scope and Methodology:
Figures:
Figure 1: Timeline of Key Contracting Events for Restore Iraqi Oil
Contract, Task Order 5:
Figure 2: Timeline of Key Contracting Events for Logistics Civil
Augmentation Program III Contract, Task Order 89:
Abbreviations:
DCAA: Defense Contract Audit Agency:
DESC: Defense Energy Support Center:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
United States Government Accountability Office:
Washington, DC 20548:
September 25, 2006:
Congressional Committees:
The United States is spending billions of dollars to achieve U.S.
political, security, and economic goals in Iraq. Between fiscal years
2003 and 2006, the U.S. government has allocated about $311 billion to
support U.S. stabilization and reconstruction efforts in Iraq. The
United States has relied heavily on private-sector contractors to
provide the goods and services needed to support both the military and
reconstruction efforts in Iraq. Faced with the uncertainty as to the
full extent of rebuilding Iraq, the government authorized contractors
to begin work before key terms and conditions were defined. This
approach allows the government to initiate needed work quickly, but can
result in additional costs and risks being imposed on the government.
Given the dollar amounts involved, it is essential that these
acquisitions be handled in an efficient, effective, and accountable
manner to mitigate the government's risk.
The Defense Contract Audit Agency (DCAA) provides services that can
help DOD ensure accountability for its acquisitions. DCAA performs
audits and provides financial advisory services in connection with
negotiation, administration, and settlement of contracts and
subcontracts. For example, DCAA has audited many Iraq contract
proposals and contracts and has identified costs it considers to be
questioned or unsupported. DCAA defines questioned costs as those costs
considered to be not acceptable for negotiating a reasonable contract
price, and unsupported costs as costs for which the contractor has not
furnished sufficient documentation to support the cost proposed or
claimed.
The Conference Report on the National Defense Authorization Act for
Fiscal Year 2006[Footnote 1] directed GAO to report on audit findings
regarding contracts in Iraq and Afghanistan. As agreed with the
congressional defense committees, we focused on Iraq contract audit
findings and determined (1) the costs identified by DCAA as questioned
or unsupported; and (2) what actions DOD has taken to address DCAA
audit findings, including the extent to which funds were withheld from
contractors.
To determine the costs DCAA questioned or identified as unsupported, we
analyzed information provided to us by DCAA on Iraq-related audit
reports issued between February 2003 and February 2006. To identify
actions taken by DOD to address audit findings and funds withheld, we
selected 18 audit reports comprised of (1) the 10 reports with the
highest dollar amounts of questioned and unsupported costs, and (2) 8
other audit reports with questioned and unsupported costs above $5
million. The questioned and unsupported costs for the 18 selected
reports totaled $1.8 billion, or approximately 50 percent of all
questioned and unsupported costs identified through DCAA's data on Iraq
contracts. The selected audit reports represent work performed by four
contractors. For each audit report, we obtained key documentation from
DCAA and DOD, and interviewed DCAA auditors and DOD contracting
officials. Appendix I provides details on our scope and methodology. We
conducted our work from March 2006 through September 2006 in accordance
with generally accepted government auditing standards.
Results In Brief:
Between February 2003 and February 2006, DCAA issued hundreds of audit
reports that collectively identified $2.1 billion in questioned costs
and $1.4 billion in unsupported costs on Iraq contracts, primarily
through audits of contractor proposals. Based on information provided
to us by DCAA, contracting officials had addressed $1.4 billion of
DCAA's questioned costs. Of that amount, contracting officials reduced
contract costs by about $386 million, according to information provided
by DCAA.[Footnote 2] Based on the information provided by DCAA, as of
July 2006, the remaining $700 million in questioned costs is still in
process. Because unsupported costs indicate a lack of contractor
information that is needed to assess costs, DCAA cannot and does not
render an opinion on those costs. Therefore, DCAA does not track the
resolution of unsupported costs.
For the 18 audit reports selected for this review, we found that DOD
contracting officials took a variety of actions in response to DCAA's
audit findings, including not allowing some contractor costs. Based on
contract documentation we reviewed, the DOD contracting officials
generally considered DCAA's questioned and unsupported cost findings
when negotiating with the contractor. We found that DOD contracting
officials were more likely to use DCAA's advice when negotiations were
timely and occurred before contractors had incurred substantial costs.
For example, in 3 audit reports related to a logistics support task
order negotiated prior to the onset of work, DCAA questioned $204
million. According to DCAA's calculations, $120 million of these
questioned costs was removed from the contractor's proposal as a result
of its audit findings. In contrast, DOD officials were less likely to
remove questioned costs from a contract proposal when the contractor
had already incurred these costs. Of the 18 audits covered in our
review, 11 audit reports corresponded to contract actions where more
than 180 days had elapsed from the beginning of the period of
performance to final negotiations. For example, in 5 audit reports
comprising about $600 million of questioned costs reviewed, we found
that the DOD contracting officials determined that the contractor
should be paid for all but $38 million of the questioned costs, but
reduced the base used to calculate the contractor's fee by $205
million. By reducing the base, the DOD contracting official reduced the
contractor's fee by approximately $6 million. In addition to
identifying questioned and unsupported costs, DCAA can withhold funds
from contractor payments,[Footnote 3] and chose to withhold a total of
$236 million for 8 cases included in our review. Of the $236 million,
the government decided to pay the contractors $148 million, not to pay
$36 million, and $51 million has not been settled yet.[Footnote 4]
We requested comments from DOD on a draft of this report, but none were
provided.
Background:
The United States, along with its coalition partners and various
international organizations and donors, has embarked on a significant
effort to rebuild Iraq. The United States is spending billions of
dollars to reconstruct Iraq while combating an insurgency that has
targeted military and contractor personnel and the Iraqi people. The
United States has relied heavily on private-sector contractors to
provide the goods and services needed to support both the military and
reconstruction efforts in Iraq.
DCAA is responsible for providing contract audits for DOD, along with
general accounting and financial advice to DOD acquisition officials
negotiating government contracts. DCAA performs many types of audits
for DOD, including audits of contractor proposals, audits of estimating
and accounting systems, and incurred cost audits. Generally, the
results of a DCAA audit are intended to assist contracting officials in
negotiating reasonable contract prices. Normally, DCAA audits
contractors' proposals and provides contracting officials advice on the
reasonableness of contractor costs prior to negotiations. DCAA also
conducts audits of cost-type contracts after they are negotiated to
ensure costs incurred on these contracts are acceptable. Relying on
cost information provided by the contractor and assessing whether the
costs comply with government regulations, DCAA may identify certain
costs as questioned or unsupported. DCAA defines questioned costs as
costs considered to be not acceptable for negotiating a reasonable
contract price, and unsupported costs as costs that lack sufficient
supporting documentation. DCAA reports its findings to contracting
officers for consideration in negotiating reasonable contract prices.
DCAA audit reports represent one way DCAA can assist contracting
officials as they negotiate government contracts. Also, contracting
officials may invite DCAA to participate in contract negotiations to
explain audit findings and recommendations, and may factor DCAA audit
findings into evaluations of contract proposals. The Federal
Acquisition Regulation (FAR) acknowledges that DCAA's role is advisory,
and assigns the contracting officer responsibility for ensuring that
the contractor's proposed price is fair and reasonable.[Footnote 5]
While DCAA audit recommendations are nonbinding, DCAA's Contract Audit
Manual states that contracting officials deviating from DCAA advice
during negotiations should explain the reasons why they disagreed with
DCAA.
DOD Directive 5105.36 also enables DCAA to withhold payments by (1)
suspending payment for specific incurred costs lacking documentation or
(2) disapproving costs that do not conform with applicable regulations.
DCAA can issue a Form 1 to a contractor notifying it that funds will be
withheld, which initiates review of the challenged costs by the
contracting officer.
DCAA Audit Reports Identified Billions of Dollars of Questioned and
Unsupported Costs on Iraq Contracts:
Between February 2003 and February 2006, DCAA issued hundreds of audit
reports that collectively identified $3.5 billion in questioned and
unsupported costs on Iraq-related contracts, primarily through audits
of contractor proposals. In some cases, DCAA was asked to audit
multiple iterations of contractor proposals as these proposals were
revised over a period of time. Based on information provided by DCAA,
contracting officials have responded to audit findings that questioned
$1.4 billion. As a result, contracting officials negotiated contract
cost reductions of $386 million according to DCAA. DCAA does not render
an opinion about costs it determines to be unsupported; therefore they
do not track the resolution of unsupported costs.
DCAA Identified Billions of Dollars in Questioned and Unsupported
Costs:
Between February 2003 and February 2006, DCAA tracked 349 audit reports
that identified about $3.5 billion in questioned and unsupported costs
on Iraq contracts. Of this total, DCAA classified $2.1 billion as
questioned, and $1.4 billion as unsupported. DCAA identified these
questioned and unsupported costs in audits related to 99 different
contractors. Most of the questioned and unsupported costs were
identified through audits of contractor proposals. Specifically, in
DCAA's database, more than three-quarters of the audits with questioned
and unsupported costs were classified as "forward pricing activity,"
which primarily involves auditing contractor proposals or parts of
proposals.
In some cases, DCAA reviewed multiple contractor proposals for the same
work. DOD officials told us that contractors submitted multiple
proposals because requirements changed or the proposal was considered
inadequate for negotiations. For example, over a 6-month period, DCAA
issued four audit reports on three different proposals for a task order
related to an oil mission. Each audit superseded the prior one, and
DCAA updates its information to reflect the most recent report.
DCAA Tracks How Questioned Costs Are Addressed but Does Not Track
Similar Information for Unsupported Costs:
While DCAA tracks and records how questioned costs are addressed by the
contracting official in negotiation, it does not track similar
information about unsupported costs. Based on the data provided to us
by DCAA, as of July 3, 2006, contracting officials had responded to 169
of DCAA's 349 Iraq audit reports. DCAA considered the findings to be
addressed because the contracting official had documented the result of
negotiations with the contractor.
Based on information provided by DCAA, for the $1.4 billion in
questioned costs addressed by contracting officials, contracting
officials sustained $386 million of the total questioned costs. DCAA
defines sustained costs as the costs reduced through negotiations
directly attributable to findings reported by the DCAA auditor for
proposal audits. Based on the information provided by DCAA, as of July
2006, the remaining $700 million in questioned costs is still in
process. DCAA's information does not reflect what actions, if any, the
contracting officials have taken to respond to these audit report
findings.
According to a DCAA official, DCAA does not track how unsupported costs
are addressed. DCAA guidance implementing the FAR requires the
contracting official to report on the disposition of questioned
amounts, but not specifically on whether contractors provided
sufficient documentation to eliminate unsupported costs.[Footnote 6]
Because unsupported costs indicate a lack of contractor information
that is needed to assess costs, DCAA cannot and does not render an
opinion on those costs. Therefore, DCAA does not track the resolution
of unsupported costs.
DOD Contracting Officials Have Taken a Range of Actions to Address
Audit Findings:
For the 18 audit reports selected for this review, we found that DOD
took a variety of actions in response to audit findings, including not
allowing some contractor costs. Based on contract documentation we
reviewed, the DOD contracting officials generally considered DCAA's
questioned and unsupported cost findings when negotiating with the
contractor. We found that DOD contracting officials were more likely to
use DCAA's advice when negotiations were timely and occurred before
contractors had incurred substantial costs. In contrast, DOD officials
were less likely to remove questioned costs from a contract proposal
when the contractor had already incurred these costs. In addition to
identifying questioned and unsupported costs, DCAA can also withhold
funds from the contractor, which it chose to do in eight of the cases
included in our review. Other actions taken by the DOD contracting
officials included inviting DCAA to attend meetings or negotiations
with the contractor and conducting additional analyses to respond to
audit findings.
DOD Generally Considered DCAA Audit Findings When Negotiating with the
Contractor:
Our review of the government's documentation of contract negotiations
for the selected audit reports showed that DOD generally considered
DCAA audit findings.[Footnote 7] The majority, or 13 of the 15
memorandums, identified how the contracting officials addressed DCAA
audit findings.[Footnote 8] Most memorandums discussed questioned and
unsupported costs identified by DCAA in areas such as labor, equipment,
material, and subcontracts, but some lacked specific detail on how DCAA
audit findings were addressed. However, in two cases we were unable to
determine from the negotiation documentation how DCAA audit findings
were used.
DOD Contracting Officials Less Likely to Remove Questioned Costs
Already Incurred by the Contractor:
To address the more than $1 billion in questioned costs related to the
audits selected, we found that the DOD contracting officials were less
likely to remove questioned costs from a contractor proposal when the
contractor had already incurred these costs. For example, in 5 audit
reports comprising about $600 million of questioned costs reviewed, we
found that the DOD contracting officials determined that the contractor
should be paid for nearly all of the questioned costs (all but $38
million), but reduced the base used to calculate the contractor's fee
(by $205 million). By reducing the base, the DOD contracting official
reduced the contractor's fee by approximately $6 million.
Generally, when entering into a contract, the government and contractor
reach agreement on the key aspects of the contract, including the scope
and price of the work, before the work is authorized to start. However,
the FAR enables the government to authorize the contractor to begin
work before doing so in certain cases, such as when the government
demands the work start immediately and it is not possible to negotiate
a fully defined contract in sufficient time to meet the
requirement.[Footnote 9] Our past work has shown that the use of
undefinitized contract actions can pose risks to the government, such
as potentially significant additional costs.[Footnote 10] Acquisition
regulations generally require that the contracting official define the
scope and costs of such contracts within 180 days of the contract's
start date. According to contract officials, urgent conditions in Iraq
led the government to initiate such contract actions without first
specifying their scope of work and agreeing to the contract price.
In many cases we reviewed, contractors completed some work and incurred
substantial costs well before the government negotiated the contract
price. Of the 18 audits covered in our review, 11 audit reports
corresponded to contract actions where more than 180 days had elapsed
from the beginning of the period of performance to final negotiations.
For nine of these audits, the period of performance DOD initially
authorized for each contract action concluded before final negotiations
took place.
For example, DCAA questioned $84 million in its audit of a task order
proposal for an oil mission. In this case, the contractor did not
submit a proposal until a year after the work was authorized, and DOD
and the contractor did not negotiate the final terms of the task order
until more than a year after the contractor had completed work (see
fig. 1). The DOD contracting officer paid the contractor for all
questioned costs but reduced the base used to calculate contractor
profit by $45 million. As a result, the contractor was paid about $3
million less in fees. In the final negotiation documentation, the DOD
contracting official stated that payment of incurred costs is required
for cost-type contracts, absent unusual circumstances.[Footnote 11]
This same rationale was used in negotiations on several other task
orders.
Figure 1: Timeline of Key Contracting Events for Restore Iraqi Oil
Contract, Task Order 5:
[See PDF for image]
Source: GAO analysis of DOD data.
[End of figure]
In contrast, in the few audit reports we reviewed where the government
negotiated prior to starting work, we found that the portion of
questioned costs removed from the proposal was substantial. For
example, in 3 audit reports related to a logistics support task order,
DCAA questioned $204 million. Since the government and the contractor
negotiated the terms of this task order prior to the onset of work, the
contractor had not incurred any costs at the time of negotiation (see
fig. 2 for timeline). According to DCAA's calculations, $120 million of
these questioned costs was removed from the contractor's proposal as a
result of its audit findings.
Figure 2: Timeline of Key Contracting Events for Logistics Civil
Augmentation Program III Contract, Task Order 89:
[See PDF for image]
Source: GAO analysis of DOD data.
[End of figure]
DCAA Withheld Funds Related to Some Audit Reports We Reviewed:
In addition to identifying questioned and unsupported costs, DCAA can
withhold funds from contractors in certain situations.[Footnote 12] The
cognizant administrative contracting officer may subsequently determine
that the withheld costs should be approved for payment to the
contractor. We found DCAA withheld $236 million from contractors
related to 8 of the audits included in our review. Subsequently, as a
result of either additional documentation provided by the contractor or
the DOD administrative contracting officer determination, $148 million
of the withheld funds was released to the contractor and the government
did not pay $36 million to the contractor. The remaining $51 million
has not been settled yet--a DOD contracting official is reviewing the
available information to make a decision about whether or not these
costs will be reimbursed.[Footnote 13]
In the audit reports reviewed, the vast majority of funds withheld by
DCAA ($171 million of the $236 million) related to dining facilities
services provided at U.S. troop camps in Iraq.[Footnote 14] The
contractor was directed by the Army to build, equip, and operate the
dining facilities located at U.S. troop base camps in Iraq and to
provide four meals a day to the camp populations. The population at
each camp was specified in the Army's description of the work to be
performed by the contractor. In addition, contractor and government
representatives counted the number of troops served at each mealtime.
However, the Army's description of the work did not specify whether the
contractor should bill the government for the camp population
identified in the work description or the actual head count for each
meal. Generally, the government was billed based on the estimated base
camp population, but DCAA stated that the billings should be based on
the actual head count, which was lower than the estimated base camp
population included in the work description. As a result, DCAA withheld
funds by reducing payment for dining facilities costs on contractor
billings by 19.35 percent. Ultimately, the DOD and the contractor
negotiated a settlement where it was agreed that $36 million would not
be paid to the contractor.[Footnote 15]
In another example, DCAA withheld a payment to the contractor for its
subcontractor's costs of $12 million related to electrical repair
services. DCAA determined the cost to be unreasonable based on a
comparison of price quotes from other subcontractors for similar
electrical repair services. As a result of the action taken by DCAA to
withhold payment, an Army Corps of Engineers contracting official
reviewed contractor data. The contracting official determined the
subcontractor's price was reasonable given the short contract time
frames. A memo outlining the Army Corps of Engineers' rationale for
paying the contractor for the subcontractor costs states, "Corps of
Engineers representatives in Baghdad directed all of the contractors
there to do whatever was necessary, regardless of cost, to meet
schedule commitments." The $12 million withheld was released to the
contractor. DCAA officials expressed concerns that the DOD contracting
official had not sought their assistance when settling this issue with
the contractor.
DOD Took a Variety of Other Actions to Address DCAA Audit Findings:
We found that DOD contracting officials took a variety of other actions
to address DCAA audit findings. In many of the cases we reviewed, DCAA
was invited to participate in meetings or negotiations with the
contractor. For example,
* To address the questioned costs identified in the task orders for the
oil mission, the DOD contracting official convened a meeting to include
the contractor representatives, DCAA officials, and Army Corps of
Engineers officials. As a result of discussions in this meeting, a DCAA
official told us that DCAA stopped questioning some costs such as the
percentage paid to contractor employees for working in a dangerous area
and price adjustments the contractor paid to its subcontractors for
fuel from Turkey. In addition, the DOD contracting official asked DCAA
to provide alternative negotiation positions, and in response DCAA
developed memorandums outlining several options for each task order.
Ultimately the DOD contracting official used a negotiation position
presented in each memorandum to establish the government's negotiation
position with the contractor. When asked if he was satisfied with the
resolution of the questioned costs, a DCAA official involved in the
process told us he thought the DOD contracting official did the best
job he could.
* In another example, DCAA attended negotiations between the contractor
and the government for an electricity contract. DCAA's role at this
meeting was to answer questions and to reiterate its opinion.
Subsequent to negotiations, DCAA participated in additional meetings
with the contractor and the Army Corps of Engineers to ensure that its
concerns with the contractor purchasing system were addressed. DCAA
officials told us that problems with the contractor purchasing system
were related to the unsupported costs identified in the audit. DCAA
officials involved in this process told us that they were generally
satisfied with the actions taken by DOD and the contractor to resolve
their audit findings.
In some cases, DOD officials conducted additional analyses in response
to DCAA's audit findings. For example, for the audit reports we
reviewed related to the oil mission, DCAA questioned the cost of fuel
and transportation based on a comparison between the price paid by the
contractor and the price paid by the Defense Energy Support Center
(DESC) when it took over the mission from the contractor in April 2004.
In response, DOD collected additional information to update the fuel
and transportation cost comparison. For example, although DESC
negotiated prices based on trucks shipping fuel to Iraq three times per
month, in practice the trucks were only able to make two trips per
month, a fact that increased the cost of the mission to DESC. Overall,
the additional analyses provided a rationale for the DOD contracting
official to pay the contractor for some of DCAA's questioned costs.
We requested comments from DOD on a draft of this report, but none were
provided.
We are sending copies of this report to the Secretary of Defense,
appropriate congressional committees, and other interested parties. We
will make copies of this report available on request. In addition, this
report will be available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you have any questions concerning this report, please contact me at
(202) 512-4841 or by e-mail at huttonj@gao.gov. Contact points for our
Office of Congressional Relations and Public Affairs may be found on
the last page of this report. Other major contributors to this report
were Penny Berrier Augustine, Tim Bazzle, Greg Campbell, David E.
Cooper, Tim DiNapoli, Julia Kennon, John Krump, Eric Lesonsky, Janet
McKelvey, Guisseli Reyes-Turnell, Raffaele Roffo, and Jeffrey Rose.
Signed by:
John P. Hutton:
Acting Director:
Acquisition and Sourcing Management:
List of Congressional Committees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable C. W. Bill Young:
Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To determine the costs identified by the Defense Contract Audit Agency
(DCAA) as questioned or unsupported, we analyzed data from DCAA's
management information system on all DCAA Iraq-related audit reports
with questioned or unsupported costs issued between February 2003 and
February 2006. To develop an understanding and assess the reliability
of the information included in the database, we held discussions with
and obtained documentation from DCAA officials located in Fort Belvoir
and we conducted electronic testing for obvious inconsistencies and
completeness. During our review of the database we identified records
for 20 audits, 1 percent of the database, which listed 2 different
totals for questioned and/or unsupported costs. For these 20 audits,
based on our conversation with a DCAA official, we selected the amount
that reflected the most current total for questioned and/or unsupported
costs. We determined the data used in our review to be sufficiently
reliable for our purposes.
To determine the actions taken by the Department of Defense (DOD) in
response to DCAA audit findings, including the extent to which funds
were withheld from contractors, we selected 18 audit reports comprised
of (1) the 10 reports with the highest dollar amounts of questioned and
unsupported costs and (2) a selection of 8 of the remaining audit
reports with questioned and unsupported cost dollars above $5
million.[Footnote 16] We excluded audit reports issued after November
1, 2005 from the selection to ensure that DOD contracting officials had
adequate time to resolve the audit findings. The questioned and
unsupported costs for the 18 audits total approximately $1.8 billion,
or about 50 percent of all questioned and unsupported costs identified
through DCAA's database on Iraq contracts. These reports include (1) 11
audits of 8 task order proposals to provide logistics support for U.S.
troops, (2) 3 audits of task order proposals to provide fuel and fuel
transportation, (3) 3 audits of task order proposals for electricity
services, and (4) 1 audit of a proposal for contract management and
administrative support functions. The 18 selected audit reports
represent work performed by 4 contractors. For the selected audits, we
held discussions with DCAA officials located in Fort Belvoir;
Arlington, Texas; Lexington, Massachusetts; Seattle, Washington; Kent,
Washington; and Iraq. We collected key documentation related to each
audit report, such as DCAA's calculation of the resolution of
questioned costs and dollars withheld (Form 1). For each audit, we also
held discussions with DOD contracting officials located in Rock Island,
Illinois; Dallas, Texas; Winchester, Virginia; and Iraq. We interviewed
these officials to determine the actions taken by DOD to address DCAA's
audit findings and obtained key documentation such as price negotiation
memorandums.
We conducted our review from March 2006 through September 2006 in
accordance with generally accepted government auditing standards.
FOOTNOTES
[1] National Defense Authorization Act of 2006, H.R. Conf. Rep. No. 109-
360, p. 767(Dec. 18, 2005).
[2] DCAA provided information that identified $453 million in reduced
contract costs. Based on our review of 18 audit reports, we found
DCAA's information on reduced contract costs included $67 million that
was paid to the contractor but removed from the base used to calculate
the contractor's fees. DCAA officials acknowledged these costs should
not be included and that the $453 million does not represent a total
reduction in contract costs.
[3] Pursuant to the authority of DOD Directive 5105.36, DCAA can issue
a Form 1. A Form 1 constitutes notice of costs suspended and/or
disapproved incident to the audit of contractor costs incurred under a
contract. Suspended costs are costs that have been determined to be
inadequately supported or otherwise questionable, and not appropriate
for reimbursement under contract terms at this time. Such costs may be
determined reimbursable after the contractor provides the auditor
additional documentation or explanation. Disapproved costs have been
determined to be unallowable, that is, not reimbursable under the
contract terms.
[4] Monies withheld do not add to $236 million due to rounding.
[5] Federal Acquisition Regulation (FAR) 1.602-2(c), Responsibilities,
15.402(a) Pricing Policy (January 2006).
[6] The FAR states when the contracting officer elects not to adopt
significant audit or other specialist recommendations, the contracting
officer should provide a rationale which supports the negotiation
result in the price negotiation documentation. Federal Acquisition
Regulation (FAR) 15.405(a), Price Negotiation (January 2006).
[7] Documentation of contract negotiations includes price negotiation
memorandums, business clearance memorandums, and definitization
memorandums. For purposes of this report, we will refer to these
documents collectively as "memorandums."
[8] There were 15 memorandums related to the selected audit reports
included in our review. Two of the memorandums addressed multiple audit
reports.
[9] FAR 16.603 Letter Contracts (January 2006).
[10] GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures
and Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).
[11] The DOD contracting official indicates that because DCAA chose not
to suspend or disallow the funds, DCAA and DOD agree that these unusual
circumstances did not exist. However, DCAA officials do not agree with
this characterization.
[12] DCAA withholds funds from the contractor by issuing a Form 1. In
general, DCAA has two options for withholding funds. DCAA can suspend
reimbursement for costs that lack adequate support until the required
data are received and a determination can be made about whether the
cost is allowable. Or DCAA can disapprove costs that are not considered
allowable.
[13] Monies withheld do not add to $236 million due to rounding.
[14] DCAA withheld a total of $212 million related to the dining
facilities issue. However, only $171 million of this total relates to
the audit reports included in our selection.
[15] The total settlement amount was for $55 million, but only $36
million relates to the audit reports we reviewed.
[16] We initially selected 10 audit reports using our second criterion.
During the course of our review, we learned that two of these audit
reports were superseded by subsequent audits, and therefore actions
taken were not documented. As a result, we removed these two audit
reports from our review.
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